Last year, Chicago and surrounding Cook County amended vacant property ordinances to clarify property stewardship requirements for homeowners and mortgagees before, during and after the foreclosure process. Opponents of the ordinance have suggested that shortening the judicial foreclosure process is a better approach than requiring mortgagees to maintain vacant properties. This oversimplifies a complicated problem.
Fast-tracking the foreclosure process makes sense in cases where a delinquent homeowner has left the property, but too many homeowners face considerable frustration in their efforts to prevent foreclosure or pursue alternatives, such as a short sale. Processing foreclosures faster will only increase that frustration.
State foreclosure processes must address the challenges faced by distressed homeowners who are working to save their homes and by those who cannot afford to remain in their homes. The Chicago and Cook County ordinances are a very necessary part of this distinction.
In a recent Woodstock Institute report entitled “Left Behind: Troubled Foreclosed Properties and Servicer Accountability in Chicago,” we identified confirmed vacant properties in Chicago and found many of these vacant properties were associated with a foreclosure initiated in the Circuit Court of Cook County between 2006 and the first half of 2010.
Many of these properties had completed the foreclosure process through auction or the property had changed hands. But for a particularly troubling subset of these foreclosure-associated vacant properties, we were unable to identify an outcome, such as a completed foreclosure auction or subsequent property transfer.
We identified nearly 1,900 of these “red flag” properties in Chicago. We called them red flag properties because, as of October 2010, they were vacant and stuck at some point in the foreclosure process. To us, the red flags indicate a lack of effective stewardership, oversight and accountability for these properties, which are in danger of falling into disrepair and having a significant negative impact on the community.
To ensure that the value of these properties is preserved, Chicago and Cook County now require mortgagees to ensure the properties they take as collateral meet basic standards of safety and livability when there is evidence the property has been permanently vacated before the foreclosure process is completed. Mortgagees must secure windows and doors, cut the grass and winterize the properties.
By taking a security interest in a home, mortgagees have an interest in the value of the property not only in good economic conditions, but also when economic conditions deteriorate. Until the beginning of the ongoing foreclosure and economic crisis, housing values were stable or increasing. This presented little risk to lenders of prolonged vacancy and the accompanying declines in both property condition and market value.
Things have changed. In the second half of 2011 in the Chicago region, 11,766 properties completed the foreclosure process, with only 747 selling at auction for the judgment amount. The remaining properties reverted to the lender as part of their growing portfolio of REO properties.
In the Chicago region in 2008, we found that these properties will likely sit on the market an estimated 16 months and lose about 30% of their auction value. This problem is particularly acute in low-wealth communities and communities of color, where properties languish even longer and see larger declines in value.
Homeowners have an obligation to maintain their property, and the Chicago and Cook County ordinances do nothing to remove that responsibility. But in practice, during prolonged periods of economic instability, mortgage payments and other property costs are just one expense in an avalanche of expenses. This presents delinquent homeowners with three options: attempt to save their home; arrange a graceful exit; or, pack up and leave.
When distressed homeowners attempt to remain in their home, they often face a complex, confusing and unproductive process. Likewise, for some distressed homeowners, getting current with no or reduced income is simply not possible. Alternatives to foreclosure, such as a deed-in-lieu or short sale, require a long process with no guaranteed cooperation from the lender and little certainty in the outcome. The large number of vacant properties still in the foreclosure process indicates that too many distressed homeowners are choosing to leave.
WHEN TO FAST TRACK
Clearly, foreclosure proceedings should be fast-tracked for vacant properties where the borrower has no ability to remain in the home. Efforts to fast-track confirmed vacant properties in Cook County are under way.
But shortening the foreclosure process for delinquent borrowers seeking to avoid foreclosure will reduce their chances of saving their homes and could ultimately result in more vacancies, not fewer.
Rather than advocating for a shorter foreclosure process, we believe lenders should fast-track loan modifications, short sales and deed-in-lieu options so that distressed homeowners clearly know their choices and can work with their lender to either save their home or transfer the title in an orderly fashion.
Until this happens on a large scale, vacant properties stuck in the foreclosure process will present problems that require accountable oversight.